Disclosure Management Systems are gaining in popularity with companies who need to meet complex and ever changing financial reporting requirements. Companies have obligations to accurately disclose information to stakeholders and to various governmental agencies on a timely basis. Pressure for more disclosures that carry complex financial and legal implications coupled with shorter reporting timeframes are causing many reporting teams to seek solutions that will enable them to realize time, accuracy and control enhancements. Disclosure Management systems (DM) effectively implemented can help companies not only meet the challenges but in some cases create additional benefits for their management team and for their stakeholders.
Not long ago, company financial disclosures followed a strict formula and routine. With the relative luxury of time, abundant manpower, and considerably less complexity in both reporting standards and in disclosure requirements, reporting teams would spend several weeks manually assembling, preparing, checking and validating their paper-based statements and accompanying management disclosures and footnotes. Rarely did the team have a need or a demand for information beyond the normal disclosures and deadlines with the US SEC and other statutory regulators.
The output of this highly manual process was created from a voluminous paper trail. Reports would build upon reports, spreadsheet totals were carried forward to other spreadsheets, and approval initials were manually added to worksheets while members of the reporting team worked independently creating report sections. At the tail end of the process a manual quality check was used to ensure accuracy for each report draft. If the company used an outside firm to create their EDGAR filing, a pencils down deadline was enforced to ensure that the EDGAR filing company had the very latest and updated version before the report was sent to the SEC.
In 2002, the SEC moved the reporting window for quarterly 10Q reports from 45 days to 35 days after the close of the quarter. 10K reports were moved from 90 days to 60 days. This action put tremendous pressure on the manual system and forced many companies to improve their reporting process and timeline.
Additional Changes to Status Quo
Although the EDGAR system was an incredible step forward, the SEC began to wonder as early as 2000 whether or not there might be a better way. Then SEC chairman Arthur Levitt encouraged the AICPA to develop XBRL further with the hope that it would lead to more meaningful information for investors. This initial thought led in part to the SEC’s voluntary then mandatory XBRL program. Reporting teams with SEC reporting requirements needed to know how to markup financial statements and disclosures with XBRL. Add another point for complexity not to mention the impact on timely EDGAR/XBRL filings.
Additionally, financial reporting teams are being asked to do more with less. According to a recent report in CFO magazine, “A combination of increasing automation, new business models, and offshoring has pushed down the average size of a finance staff by 30% over the past six years — to 92 people per $1 billion in revenue — according to benchmarking firm The Hackett Group.” Prospects for adding people to the finance staff are further depressed by a shortage of qualified professionals.
Even with the advances in cloud computing, data warehousing, ERP and more, the reporting process continues to be a time consuming process. The Financial Executives International Committee on Corporate Reporting recently sent a comment letter to the chairman of the Financial Accounting Standards Board (FASB) stating in part:
“The proliferation of disclosure requirements in recent years, coupled with disclosure redundancy between U.S. GAAP requirements and the Securities and Exchange Commission’s (SEC) Rules and Regulations, have put financial reporting on an unsustainable path in terms of a preparer’s ability to fulfill the requirements in the time allotted and a user’s ability to process all of the available data in an attempt to isolate critical information.”
Enter Disclosure Management Systems
Mike Willis, Partner at PriceWaterhouseCoopers (PWC) is an advocate of effective Disclosure Management (DM) application implementations. According to Willis, DM applications can enable streamlining of current “Last Mile” manual report assembly and review processes. Think about this. Every reporting source is seamlessly tied together in a collaborative environment allowing multiple touches by the team while keeping the links to underlying data intact. Willis, in a PWC white paper available here further states:
“Disclosure Management applications provide report-writer functionality through word processing and spreadsheet applications commonly used in manual reporting steps. However, fundamental functional differences between contemporary Disclosure Management applications and previous report writer applications can enable streamlining of common manual Last Mile processes.
Disclosure Management applications also provide discrete and reusable mapping from each information disclosure contained within a report to relevant XBRL structures that enable automated production of reports in the XBRL format.”
Common sense dictates that companies take a hard look at disclosure management systems in the hope of making improvements in their reporting processes and controls. With that in mind, here is what you should look for in a disclosure management system.
The first attribute in an effective disclosure management system should be an interactive collaborative environment serviced by a single source platform. The single source platform assures that all participants in the process are using the same data which reduces error and saves time. The system should be available 24/7 with round the clock support.
Another important attribute for effective DM implementation is its ability to interoperate or connect with company source systems as well as publicly available interactive data sources for benchmarking and risk assessments. The beauty of an effective system shines light on opportunity to add additional value to reporting stream and create easy transitions to additional reporting requirements. A case in point is the latest proposal from the SEC regarding the reporting of executive pay vs. performance.
With regards to XBRL, the disclosure management system should closely align reports with the relevant XBRL taxonomy and enable checks of the completeness, accuracy and consistency of disclosures and benchmarking risk assessments with other public company disclosures.
The above DM activities require an interactive online environment where every member of the reporting team plus trusted others (such as the legal team, the board audit committee, and internal audit) can not only see the results but also have active visibility and input where needed.
The perfect sense of this approach is galvanized by the drive for greater accuracy, timeliness and control. Accuracy is improved by sourcing data into the disclosure management system from a single system with appropriate controls creating one version of the truth. Timeliness is improved by providing an online collaborative system that can automatically handle multiple users working in parallel. Control is improved with built in checks and balances for approvals and signoffs. A fully functional disclosure management system should also provide validation checks to ensure that reporting formats such as XBRL are correctly formatted.
Disclosure Management is Global and Varied
For many companies the 10Q/10K SEC orientation is only one of many XBRL reporting requirements. (See the listing of statutory reporting around the world on the XBRL website.) Many financial reporting executives are surprised to learn that statutory regulators around the world have migrated to XBRL and have therefore not considered International reporting requirements for their DM application implementation. ‘Financial’ reporting is only part of this new standardized supply chain – as we see with Tax, Statutory, Statistical, and now the new SEC proposed executive compensation reporting requirements mentioned above.
Companies that move forward effectively installing DM applications can gain in other ways as well. Most will see an increase net benefits by gaining a clear understanding of common reporting process enhancements. Once a process is documented, mapped, and captured within a disclosure management system, non-value added steps become apparent and can be eliminated. Duplicate effort, copying and pasting, redundant approvals, delays and mistakes can be readily found and removed from the process.
Additionally, benchmarking / risk assessments via comparisons with other company disclosures can be realized by DM applications that can consume XBRL disclosures from publicly available sources. This is an important feature to consider as the regulators ramp up their analytical capabilities. Today’s reporting executives should/may want to perform the type of risk assessments (See the SEC’s Accounting Quality Model or RoboCop) on their reports prior to the regulators doing so. They may also want to take a proactive approach regarding disclosures by sending the regulators comment letters or consider more aggressive follow up.
Companies today are looking for the best possible way to cope with the increasing regulatory burden, the shortening of time permitted to prepare and submit required disclosures and the shrinking of accounting teams and available talent. The most appropriate answer to this dilemma is to find a great disclosure management system and implement it effectively. The sooner companies adapt robust disclosure management systems the sooner they can reap the benefits. It just makes perfect sense.
DataTracks US is part of DataTracks Services Limited, leaders worldwide in preparation of financial statements in EDGAR HTML, XBRL and iXBRL formats for filing with regulators. With a track record of over 10 years, DataTracks prepares more than 12,000 XBRL statements annually for filing with regulators such as SEC in the United States, HMRC in the United Kingdom, Revenue in Ireland, ACRA in Singapore and MCA in India.
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